Business Advantages of Outsourcing in the Philippines

Due to Filipinos’ proficiency in the English language, the Philippines has become one of the most popular outsourcing destinations in the world. In fact, the Business Process Outsourcing industry has been growing exponentially. Aside from employing over 1.44 million Filipinos, it helped boost the Philippine economy over the years.^[1]

The Major Tax Incentive Authorities

The Philippines has two major tax incentive authorities tasked with promoting investment in the country and in awarding tax incentives to qualified businesses. The first is the Philippine Economic Zone Authority (PEZA), and the second is the Board of Investment (BOI).

BOI registration supports Information Technology, Information Technology-enabled, and Information Communications Technology support services including Business Process Outsourcing, software and application development, internet service provisions, and other related fields of interest.

On the other hand, PEZA was created specifically to assist foreign business entities within designated areas in the Philippines called PEZA Special Economic Zones. Like the BOI registration, PEZA registration also supports companies in the Information Technology field including software development and application, Information Technology-enabled services, content development for media, Business Process Outsourcing, and Information Technology research.

In September 2022, the Fiscal Incentives Review Board (FIRB) announced that the Information Technology-Business Process Outsourcing (IT-BPO) industry will be allowed to implement a 100% work from home setup while retaining their incentives, by allowing their registrations to be transferred from PEZA to the BOI.^[2]

The tax incentives offered by PEZA and BOI

The benefits of a BOI registration include[3]:

Fiscal Incentives

• income tax holidays
  • six (6) years for projects with pioneer status and for projects located in a Less Developed Area (LDA)
  • four (4) years for new projects with non-pioneer status
  • three (3) years for expansion/modernization projects
• duty exemption on imported capital equipment, spare parts, and accessories
• exemption from wharfage dues and export tax, duty, impost, and fees
• tax exemption on breeding stocks and genetic materials
• tax credits on imported raw materials
• tax and duty-free importation of consigned equipment
• additional deduction for labor expense

Non-Fiscal Incentives

• employment of Foreign Nationals
• simplification of customs procedures for imported products
• importation of consigned equipment
• privilege to operate a bonded manufacturing/trading warehouse (subject to custom rules and regulations)

Some BOI-registered companies, however, are required to export 70% of their yearly production, and foreign-owned firms must comply with a 40% Filipino ownership composition for a specific number of years.

On the other hand, PEZA accredited businesses are issued with certificates which entitle them to fiscal and non-fiscal incentives.[4] These include:

Fiscal Incentives

• For Export-oriented Enterprises, Income Tax Holiday (ITH) of 4-7 years and availment of Special Corporate Income Tax (SCIT) rate of 5% OR Enhanced Deductions (ED) for 10 years
• For Domestic Market Enterprises, Income Tax Holiday (ITH) of 4-7 years and availment of Enhanced Deductions (ED) for 5 years.

Non-fiscal Incentives

• For Export-oriented Enterprises, Income Tax Holiday (ITH) of 4-7 years and availment of Special Corporate Income Tax (SCIT) rate of 5% OR Enhanced Deductions (ED) for 10 years
• Tax- and duty-free importation of capital equipment, raw materials, spare parts or accessories
• Domestic sales allowance of up to 30% of total sales
• VAT exemption on importation and VAT zero-rating on local purchases for goods and directly related to its registered activity to include telecommunications, power and water bills
• Exemption from payment of national and local government taxes and fees for the period of availment of the 5% SCIT incentive
• Employment of foreign nationals
• Long-term land lease of up to 75 years
• Issuance of a 2-year PEZA Visa for foreign nationals employed by PEZA-registered companies and their dependents

Foreign investors are granted permanent residency status upon an initial investment of USD 150,000 to any sustainable, local enterprise.

The main difference between PEZA and BOI is that PEZA tax incentives offer an additional benefit of VAT exemption on all purchases made in the Philippines.^[5] In addition, PEZA beneficiaries must be located in the PEZA Special Economic Zone.^[6] On the other hand, Companies receiving tax incentives from the BOI can locate anywhere in the country.

For foreign companies interested in legally setting up and registering outsourcing business in the Philippines, it is best to consult a business registration lawyer and be guided by one of the top law firms in the Philippines. The company registration lawyers in BGC are committed to advising foreign companies in choosing a tax effective structure for their businesses in the Philippines.

Written by: Carmel Louise Vicencio

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